Does stock liquidity curb or fuel corporate financial fraud? Evidence from Chinese listed firms: A pre-registered report

Abstract

Stock liquidity is a defining feature of modern capital markets, yet its impact on corporate financial fraud remains unclear. This study investigates whether stock liquidity constrains or exacerbates corporate financial fraud among Chinese listed firms. Drawing on competing perspectives of external monitoring and managerial short-termism, we develop opposing predictions: liquidity may reduce fraud by improving price informativeness, external monitoring, and governance discipline, or increase fraud by intensifying short-term market pressure and incentives for opportunistic reporting. Using Chinese A-share firms from 2009 to 2023, we examine the association between stock liquidity and financial fraud and exploit the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs as quasi-natural shocks to market liquidity and investor access. The empirical design combines firm-level panel regressions, difference-in-differences analyses, mechanism tests, and robustness checks using alternative measures of liquidity and fraud. This study contributes to the literature on the governance consequences of stock liquidity and provides evidence relevant to market liberalization, investor protection, and corporate accountability in emerging capital markets.